The Bank of England becomes one of the most powerful central banks in the world today, with an extended remit being the bedrock of a shake-up in Britain’s regulatory system.
As part of sweeping changes, the Financial Services Authority is abolished to be superseded by three new bodies – the Prudential Regulation Authority (PRA); the Financial Policy Committee (FPC); and the Financial Conduct Authority (FCA).
The PRA, which will monitor the financial strength of individual banks and insurers, and the FPC, which will police systemic risk including unsustainable credit booms, will be based within the Bank of England. An independent FCA is charged with keeping financial markets clean, protecting investors against mis-selling, and promoting competition within the industry.
The incoming chief executive of the FCA has warned the industry that the new conduct regulator would adopt a hardline approach where necessary to stamp out bad practice. This will include powers to ban questionable financial products with immediate effect.
Martin Wheatley said financial firms needed to enforce “cultural changes which promote good conduct”, including products which are “transparent” and meet customers’ needs.
He said: “Firms need to ensure that they are putting the consumer and the integrity of markets at the heart of their business models and strategies.
“There is no room for the poor behaviour of the past. We will take action early and decisively when we see evidence of poor practices.”
The FCA has been given the power to make “emergency rules” banning products or restricting their sale if it believes consumers are at significant risk. Such rules would come into play if the regulator believed a product was in danger of being sold to the wrong customers – such as if a firm was trying to push complex or niche products to the financially unsophisticated mass market.
The initial clampdown would last for a maximum of a year, and the FCA would either consult on a permanent ban or come up with another way of addressing the problem.
Wheatley has moved to reassure the industry that the powers will only be used where there is serious cause for concern.
He has said: “Some in the industry are concerned about us using this power too hastily … I do not expect us to use this power frequently, but both industry and consumers need to be clear that we will not hesitate to use these powers where we have serious concerns.”
The new FCA boss shocked many in the industry last year when, ahead of him taking control today, he warned he would “shoot first and ask questions later” if he thought there was serious danger of mis-selling.
But Wheatley has since toned down the rhetoric, saying he wanted to work with the industry, and that prevention of scandals through early regulatory action was better than serial fines.
Recent British mis-selling scandals under the FSA’s tenure have included payment protection insurance (PPI), personal pensions, some endowment mortgages, and selling of inappropriate derivative hedging products to Britain’s small businesses.